WHO IS LENDING MONEY?

Who is lending money?

Introduction

The question of who will lend you money in times of need is not too difficult to answer. Of course the easiest and often, with little formalities, would be our parents. However, don’t tap on them too much unless they are super-rich, as they would have alternative arrangements for their old age. There are many financial calculators you could access on the internet which will roughly work out as to how much you need to sustain a reasonable life style after retirement at about 60 years (have you enough money to retire?).

Friends and relatives may be worthy of a trial, but when the request is turned down or when repayments are delayed the relationship would sour and you ‘may lose that relationship’.

Of course saving for the financial need may be a way out, that is the conventional way, but in most instances it would not be possible. If you want to start a business there us a need for urgent ‘credit’ and you would have done your calculations based on the profits to be made once the business gets going, that will pay-off your instalments in the future.

Financial Institutes

There is money to be made from loans and all financial institutes will lend money on their own terms so that they can recover a larger sum over a period of time (tenure if the contract). Although they may permit small sums without a collateral (personal loans), many a time the borrower would want a bigger loan (to purchase a house) and that attracts a huge interest on top of the principal sum borrowed. In fact the longer the loan the larger the total repayment is. By keeping the duration of repayment short and taking a smaller loan would be preferred. Again look up the numerous ‘mortgage’ calculators for the instalments to be paid against the duration (years) and the interest rates.

There are quite a few financial institutes willing to give loans to eligible borrowers. Apart from commercial banks, the Finance Ministry gives loans to government servants at reasonable rates (4%). Insurance companies, cooperative societies and private agencies also provide this facility. But avoid the ‘loan sharks’ introduced by friends or through advertisements you would find on telephone post and walls of buildings. Another mode is the use of the credit card for emergency funds and daily transactions. Much has been written about the use of credit cards to draw funds. Be mindful of the huge interest (15-18%).

Interest Rates

Having said that let me reflect on the first housing loan I took from a commercial bank in the 1980’s. It was difficult as the bank manager was cautious of approving my request as times were hard and my income was meagre. However, it was for a small house and hence that was used as the collateral. Though I had come out with a 30% down payment, it did not matter as far as the interest rate was concerned, it was 11.8%! There were no further negotiations, nothing to discuss about monthly rest or yearly rest. Of course the former would be advantageous to the borrower.

Currently the mortgage on houses and property at large draws lower interest and figures like 6-7 % (above the base lending rate) are not uncommon (check with the respective institutes for accuracy).

There are several schemes of repayment that may reduce the total sum borrowed and that is good.

Reducing your borrowings legally

A recent article in the NST (Jan 27, 2012) entitled ‘Turning debt into wealth’ by Michael Yeow, is worth sharing. He zooms down to some fundamental principles. I chose this subject as by far taking a housing loan is by far one of the largest financial commitment and many say that about 30% of our earnings go to paying off the housing loan. Basically you tend to pay about RM 500 000 when you compete repayment of a loan of say RM 250 000 after 30 years. You would not appreciate this till you did the ‘numbers’. On the other hand that would be the only way you would be able to purchase a property. Using the current rates, Yeow says that when you take a 30 year loan you would have reduce not more than 7 % of the sum at the end of five years! Now that is truly depressing. Now what will it be after say, 20 years; you still have to pay another 50 % of the principal sum.

The article highlights ways and means to reduce the loan if possible rather than wait till the tenure ends. Again it is advisable to shop for the loan that best fits you and your earning income. Be aware that the financial institutes would not be happy if you settled your loan within a short period (say by 3 years because you had a windfall, or a relative left you a huge sum in his will!) after signing the contract say for 15 years. A penalty is imposed on such repayments.

Yeoh highlights the following strategies to reduce you loan amount:

·         Paying more than the stipulated instalment

·         Fortnightly payment rather than monthly payment

·         Refinancing

·         Using Flexi Mortgage

·         BLR adjustment

·         Drawing savings from the Employees Provident Fund

Paying extra each month to reduce the principal sum borrowed would reduce the total sum to be repaid but requires negotiation with the bank and how the contract is written. A word of advice is to ensure that the extra sum really is utilized to reduce the principal loan amount and is not used to contribute to payment of the instalments (which includes the interest due).

Fortnightly payment is preferred, if you can afford this as you would be reducing the total due. More instalments and less to repay. Yeoh says that by a simple arrangement like paying twice a month you would effectively reduce the 30 year tenure by four years!

Refinancing would incur the formalities of re-drawing the contract, processing fees and legal fees. But one needs to do his calculations to see if this is worth it. Well if the interest I paid (11%0 has dropped to say 6%. Clearly it is worthwhile re-financing. So keep tract of the base lending rate and what interest is being charged currently when you have drawn a contract for 30 years. The financial climate out there is changing f very rapidly and interest rates have fallen considerably over the last few years. Another option the author mentions is to maintain the same instalment but request the bank to reduce the interest rates. It is worth talking to the bank officers as they too want to maintain a good relation with clients and are amenable to negotiation. The financial institute would want you to be regular with your payments and any default will impact on their business as’ 'non-performing loan’

The Flexi Mortgage has become popular with many as it involves having a current (mortgage account) where you can deposit all the extra money you have without any negotiations. As long as there is adequate funds that do exceed the sum promised as instalments, no interest is drawn. Another feature is that interest is on daily rest and not a monthly rest. That arrangement is advantageous to the borrower. So keep the instalment on schedule, deposit any extra cash you have and get the principal sum reduced.

It is always important to watch the base lending rate (BLR). The BLR is regulated by the National Bank and interest is based on this figure (BLR +4%). So if the BLR is 3%, the interest would be 3+4=7%. The BLR will fluctuate and hence one needs to talk to the bank as to how it affects your instalment. In most instances the bank would send you a note of changes in the BLR and how the interest would be affected. This means that it will also affect the instalment. If there is no change made to your instalment in spite of a higher BLR, then you may be paying for a longer period! Best advice is to pay the extra sum when the BLR rises.

The EPF has an account (II) which you could withdraw to reduce the principal sum and effectively reduce the repayment period. But be mindful of any penalties that may be incurred with early payment. Discuss with the financial institute as to how it will be advantageous to you.

Conclusion

I was happy that Michael Yeoh has summarised the measures you should take when borrowing money from a financial institute to purchase a property. Read the contract and see how you could repay in a shorter period so as to save your money.

Siva

29 Jan 2012

Caveat:  The contents of this article are not written by an expert in finance. Kindly check for accuracy with your financial adviser.

The BOND Market

The BOND Market

Introduction

Bonds are investment products that can be purchased through banks and other investment outlets. I never could understand about them being different from what you could purchase through the Share Market (Equity).

We have heard about the Bulls and the Bears. We have heard that the trading price of many of the established companies tend to follow trends and several factors dictate the way the market moves. When there is a ‘bull run’ an upward trend is inevitable. So if a particular counter, say ‘Public Bank’ was trading at about RM 12, it may climb to about, say RM 13.50. Those who watch the market may find this an opportune time to sell of their share (say 1000 shares they hold). Excluding the transaction fees, one would make a tidy sum because of the difference between bought and sold price.

Bonds

The Bond Market is a different product altogether and one needs to be familiar with how it works before getting involved.

A ‘bond fund’ invests in bonds which are debt instruments. Both governments and private enterprises need money to run their ‘business’ and taking up a loan from the banks may be one of the means of raising money. But when the sum is huge it becomes difficult to easily get such loans. So what these huge companies (and governments) do is to raise the desired money through bond certificates. Investors like you may desires to lend the money for a fixed period of time ranging from a year to several years. The borrower would issue an ‘IOU’ kind of certificate to pay back the principal sum borrowed including interest that is agreed on from the beginning, say 5 % at the end of each year.

The interest the bond holder will receive at regular intervals; it is common for the issuer to pay at six month intervals, is called the ‘coupon rate’. In fact the latter term came to common use in the beginning as coupons were attached to the ‘IOU’ certificate so that they could be detached at periodic intervals and surrendered to the company for payment of interest!

Terms use in Bonds

The term ‘nominal value’ is the amount of money the issuer of the bond has agreed to pay the bond holder at the end of the maturity date (face value or par value).

Bond fund issuers would have a trustee who , remaining as a third party, has a role in ensuring the terms and conditions of the trust deed (the legal agreement giving all the details of the bond fund and  the issuer’s obligation to the issuance of such bond certificates).

Unlike trading in the Stock Market (Share market), bonds are actually debt instruments and you are the creditor to the company. All returns on bonds are pre-determined. They have a maturity date so that if you intend to hold your money in bonds, you should be able to afford not needing to access this money till the maturity date.

The Stock market is different in that when you buy a stock you ‘own’ part of the company (small as it may be). Stocks are ‘equity’ and returns on the shares very much depend on how well the company is doing. You have an option of holding on the shares for as long as is allowed deriving dividends the company may declare from time to time. Market forces and the strength of the company dealings and business done all affect the price of the share. There is a risk factor involved especially in a bearish market.

Bonds generally are less risky but this again depends on how the company performs over the period of time while you wait for the maturity period. Credit risk is when the issuer fails to pay the ‘coupons’ or is unable to pay the principal sum invested. There is also what is called ‘interest rate risk’. This so called price risk or market risk may arise because or capital loss (income loss) as a result of change in level of interest rates. This would affect the bond price.

Some characteristics of Bonds

There are ratings agencies that rate the bonds issued based on the factors that may affect the value (e.g. RAM).

In the USA, Standard and Poor is one of the rating agencies who grade the Bond according to how risky it is. The following is an example

Rate	Comment
AAA	Highest Quality
AA	High Quality
A	Strong
BBB	Medium
BB, B	Speculative (JUNK)
BB, B	Highly speculative

When the rating is ‘D” it is in DEFAULT.

Reading the Bond Market

It is worthwhile knowing what the tables show when you review how the bond you purchased is doing. The common way it is presented is as in the table below.

Name of Company	Coupon (Interest)	Maturity Date	Bid Price	Yield

The coupon refers to the interest on the principal. The maturity date is the year the bond would mature. If a (c-) appears than the bond is callable; if c11 is seen, the bond is callable in 2011.

The bid prices refer to what someone is willing to pay for the bind (e.g. 94 means 94%).

The yield relates to the maturity date and not the current year.

Regulations

The Security Industry Development Corporation (Malaysia) produces little information booklets that gives information on a variety of investment products. Bonds are all approved by the Securities Commission Malaysia.

Discussion with a financial consultant would be advisable before making a decision as to what the best form of investment your ‘risk appetite’ permits. All investments have risks and the bond market is not different. Credit risk and Interest –Rate risks are thee two common ones that if often mentioned.

Conclusion.

Bonds are debt instruments. They can be purchased through banks and brokerage companies. Government bonds are the safest to purchase. High risk/high yield bonds are speculative in nature and are also called JUNK bonds.

References

A short tutorial on BONDs http://www.investopedia.com/university/bonds/bonds7.asp#axzz1gJgk0Pmx

Bond: Mission to Invest SIDC

www.sidc.com.my

Disclaimer:

The comments made here are not to be used for making decisions on any form of investment as I am not promoting any particular investment instrument. As I have said it is advisable to talk to a financial consultant before making any commitment.

Sivalingam Nalliah

12 Dec 2011

You And Income Tax

We may not realize that taxation is required by law until we start working. The amount of tax to be paid depends on the total sum earned and the tables for such are available from the Inland Revenue Department (Income Tax). The rules of the game is that it is an offence not to pay tax on earned income (if it falls in the taxable income) and more than that , it is the responsibility of the resident to declare his/her income. The current taxation system permits employees to be taxed at source (when your pay is due). Self employed persons need to submit their earned income when they declare their income returns each year (April-May).

Historical Perspectives

Income tax was introduced in Malaysia in 1947. The Income tax Act currently in force came in 1967. Tax laws tend to be reviewed periodically to sustain a fare tax system and to assit the government of the day to run the finance system efficiently. The two categories of tax in force today are:

·         Direct tax

·         Indirect tax

Direct tax refers to a person who files his annual returns and pays the tax due.  We also pay direct taxes when we purchase out petrol and when we sell our property much too soon after purchase (property gains tax, to reduce speculations on real estate).

Indirect tax is paid by a person who claims it from the consumer. While a trader may import goods from an overseas source and pays the import duty and sales tax, he would pass on to the consumer eventually through appropriate pricing of the good imported.

You would realise that you tend to pay more than what the bill shows when you pay your telephone bill and electricity bill. The hotel bill will have an additional  (++) sum added on to the room rate and this may go up a further 15 %! Terms like service tax and sales tax are used in these instances. Many consider indirect tax as ‘consumption tax’. Malaysia has been planning to replace many of the latter with the Goods and Service Tax (GST) but has not implemented this for reasons known to the departments concerned. The GST is in place in many countries and is not a new idea.

Paying your tax

Both individuals and corporations pay tax. So do public listed companies and societies. Your local club and and co-operative society would also have to pay income tax. The term chargeable person is the correct word for eligibility to pay income tax. Anyone who resides in the country is eligible for taxation. So if you earn money outside the country then you are exempted. The policy governing banks, insurance companies, sea and air transport follow a slightly different policy.

I won’t deal with the taxes paid by corporations and companies. As individuals one has to pay tax depending on is declared income annually. The tax bracket ranges from 0-26% (used to be 27 % a year ago). The recent budget did not consider reductiing personal income tax, hence the upper limit remains at 26% (if you are above the annual income of RM 100 000). For income beyond that a sliding scale is followed (see the current rates form IRB, Malaysia portal).

Resident Individual tax rates for Assessment Year 2010

Chargeable income (RM)	Calculations (RM)	Tax Rate %	Tax Amount (RM)
0-2500	On the First 2,500	0	0
2,501-5,000	Next 2,500	1	25
5,001-10,000	On the First 5,000 Next 5,000	3	25 150
10,001-20,000	On the First 10,000 Next 10,000	3	175 300
20,001-35,000	On the First 20,000 Next 15,000	7	475 1,050
35,001-50,000	On the First 35,000 Next 15,000	12	1,525 1,800
50,001-70,000	On the First 50,000 Next 20,000	19	3,325 3,800
70,001-100,000	On the First 70,000 Next 30,000	24	7,125 7,200
100,001-150,000	On the First 100,000 Next 50,000	26	14,325 13,000
150,001-250,000	On the First 150,000 Next 100,000	26	27,325 26,000
More than 250,000	On the First 250,000 Next RM	26	53,325 ..........

All individuals follow the self assessment system and as mentioned above, it is  your responsibility to declare your annual returns. The automated system (electronic declaration form) available is user friendly and helps you work out the payable income tax. It is incumbent on the tax payer to keep all records pertaining to your salary and expenses (bills, payment certificates) for inspection when requested to, for a period of seven years.

Personal relief

The taxations system has provided for personal relief, insurance relief and relief for caring for parents and children who require special needs and medical equipment. Medical insurance could also fall under tax relief. Details of these are available from the IRB portal (Inland Revenue Board).

List of Tax Relief for Resident Individual 2010

No.	Individual Relief Types	Amount (RM)
1	Self and Dependent	9,000
2	Medical expenses for parents	5,000 (Limited)
3	Basic supporting equipment	5,000 (Limited)
4	Disabled Individual	6,000
5	Education Fees (Individual)	5,000 (Limited)
6	Medical expenses for serious diseases	5,000 (Limited)
7	Complete medical examination	5,00 (Limited)
8	Purchase of books, journals and magazines	1,000 (Limited)
9	Purchase of personal computer	3,000 (Limited)
10	Net saving in SSPN's scheme	3,000 (Limited)
11	Purchase of sport equipment for sport activities	300 (Limited)
12	Subscription fees for broadband registered in the name of the individual.	500 (Limited)
13	Interest expended to finance purchase of residential property. Relief of up to RM10000 a year for three consecutive years from the first year the interest is paid. Subject to the following conditions: (i) the taxpayer is a Malaysian citizen and a resident; (ii) limited to one residential unit; (iii) the sale and purchase agreement is signed between 10th March 2009 and 31st December 2010; and (iv) the residential property is not rented out. Where: (a) 2 or more individuals are eligible to claim relief for the same property ; and (b) total interest expended by those individuals exceeds the allowable amount for that year , Each individual is allowed an amount of relief for each year based on the following formula: A x B C where; A = total interest allowable in the relevant year; B = total interest expended by the relevant individual in the relevant year; C = total interest expended by all the individuals.	10,000 (Limited)
14	Husband/Wife/Alimony Payments	3,000 (Limited)
15	Disable Wife/Husband	3,500
16	Ordinary Child relief	1,000
17	Child age 18 years old and above, not married and receiving full-time tertiary education	1,000
18	Child age 18 years old and above, not married and pursuing diplomas or above qualification in Malaysia @ bachelor degree or above outside Malaysia in program and in Higher Education Institute that is accredited by related Government authorities	4,000
19	Disabled child Additional exemption of RM4,000 disable child age 18 years old and above, not married and pursuing diplomas or above qualification in Malaysia @ bachelor degree or above outside Malaysia in program and in Higher Education Institute that is accredited by related Government authorities	5,000
20	Life insurance and  EPF	6,000 (Limited)
21	Premium on new annuity scheme or additional premium paid on existing annuity scheme commencing payment from 01/01/2010 (amount exceeding RM1000 can be claimed together with life insurance premium)	1,000 (Limited)
22	Insurance premium for education or medical benefit	3,000 (Limited)

Some personal relief that some may not know of are included below:

Tax Relief	Amount
Purchase of Reading  Materials Purchase of books, magazine, journals or other similar publications (in form of hardcopy or electronic but exclude newspapers or banned reading materials) for enhancing the knowledge of the individual, husband/wife or child.	RM1,000
Purchase of Sport Equipment Purchase expended by the individual for any sports activity as defined under the Sports Development Act 1997. Sports equipment includes equipment with short lifespan e.g. golf balls and shuttlecocks but excluding sports attire, swimsuits and sports shoes.	RM300
Purchase of Personal Computer This relief is deductible for personal computer in respect of the purchase of personal computer. No deduction for individual will be granted if the computer is used for business purpose. This deduction is allowed once in 3 years.	RM3,000
Medical Expenses for Parents Medical expenses which qualify for deductions would include: (i) medical care and treatment provided by a nursing home; and (II) dental treatment limited to tooth extraction, filling, scaling and cleaning but not including cosmetic dental treatment expenses such as teeth restoration and replacement involving crowning, root canal and dentures.	RM5,000
Medical Check up Complete medical examination refers to thorough examination. Amount expended on own self, the spouse or child. This would promote a healthy nation and emphasize the importance of prevention of illness rather than treating illness ( a bit too late)	RM500
Broadband Subscription Expenses expended by the individual for the payment of broadband subscription under the individual’s name. This deduction is only allowed for Years of Assessment 2010, 2011 and 2012. This benefit promotes individuals to be aligned to being in line with our status as a nation that would optimise all the benefits of IT (information , education and communication using IT)	RM500

Education Fees (Self) For fees expended on any course of study up to tertiary level in any institution in Malaysia recognised by the Malaysian Government or approved by the Minister for the purpose of acquiring any skills or qualifications: (i) up to tertiary level (other than a degree at Masters or Doctorate level), for the purpose of acquiring law, accounting, Islamic financing, technical, vocational, industrial, scientific or technological skills or qualifications; or (ii) any course of study for a degree at Masters or Doctorate level. This relief permits personal development that would contribute to better productivity and indirectly benefit the nation in capacity building

RM5,000

For complete tax relief list, please visit http://www.hasil.gov.my.

 Conclusions:

As a good citizen we should pay income tax (chargeable) as it is required by law. Self assessment is now in vogue and taxation at source is the mode for employees. There are provisions for tax relief and this should be claimed for so that you pay only tax that is due.

All records pertaining to income tax should be retained by the tax payer for a minimum period of seven tears.

(Disclaimer: There may be errors and omissions in the article at the point of writing . It is not meant to be comprehensive. For details you are advised to refer to the above e-mail address or consult your financial adviser)

Sivalingam Nalliah 27 Nov 2011